Goldman and Morgan as Bank Holding Companies

I'm torn about the news this morning on Goldman and Morgan flipping to a bank holding structure. It's overdue that the two companies are shrinking their leverage and rethinking their approach to risk, and I don't care about the end of Wall Street's supposed gilded age.

But saddling up with the Federal Reserve as banks worries me. To be somewhat cynical, anything that Goldman Sachs and Morgan Stanley agree on that involves any sort of backstop by U.S. taxpayers is almost, by definition, not good for the rest of us. It's sort of like the old joke that if you're playing poker and you don't know who the mark is at the table, it's you.

Feel free to talk me down, but this feels like we're heading in worrisome new directions. I would like to see more bank consolidation, not less, and the sudden rush among banks to be backstopped by the Federal Reserve and consumer deposits in a shrinking credit environment is a trend that can only go so far without creating new risks.

More here.

Comments

[JackEllis:]

I'm not sure I agree that more consolidation is better. The only advantages are economies of scale and less competition. the overwhelming disadvantage is that it increases the number of institutions that are "too big to fail" and concurrently increases the risk to taxpayers. Sorry but in this particular instance, my instincts as a taxpayer trump my instincts as an investor.

2008 Sep 22 12:33 PM

[Reflections:]

It is surprising how a Great nation can so quickly forget great lessons of the past.Glass Steagal Act of 1933 was made drawing from the learnings of Great depression and served the nation reasonably well for long,though amended later.Now,with this fed decision,we will have heady mixture of Invt and Commercial banks which caused the financial disaster in 1930s and again in 2008.Wonder where the Congress oversight is?Or is it that everyone is being bulldozed over with horror stories being drawn by Treasury?

2008 Sep 22 01:37 PM

[williambanzai7:]

How The Grinch Almost Killed Wall Street
(How the Grinch Stole Christmas revised by
William Banzai7)
williambanzai7.blogspo.../

Every Banker down on Wall Street Liked CDOS a lot...
But the Grinch,Who lived just north in Greenwich, Did NOT!
The Grinch hated those investment bankers for a whole list of reasons!
Now, that is why we are having this exciting fall season.
It could be his trader head was screwed on just right.
It could be, perhaps, that his white shoes were a little too tight.
But I think that the most likely reason of all,
May have been that his NAV was 12 sizes too small.
Whatever the reason, His smarts or his shoes,
He stood there last week, hating all Wall Street's Whose Whos,
Staring down at his trading NAV with a sour, Grinchy frown,
Detesting those warm lighted screens in Wall Street town.
For he knew every Captain down in Wall Street beneath,
Was busy now, trying to sail through the great Subprime reef.
"And they're firing their traders" he snarled with a sneer,
"In three months its Christmas! It's practically here!"
Then he growled, with his Grinch fingers nervously drumming,
"I MUST find some way to give those investment bankers a drubbing!"
For Tomorrow, he knew, all the Whose Who of Bankers,
Would wake bright and early. And rush to save all their bonus earnings!
And then! Oh, the noise! Oh, the Noise!
Noise! Noise! Noise!
That's one thing he hated! The NOISE!
NOISE! NOISE! NOISE!
Then the Whose Whos, young and old, would all fly Far East.
And they'd try to talk Korea and China into feasting on trading book yeast!
And they'd feast! And they'd FEAST!
FEAST! FEAST! FEAST!
They would feast on champagne and rare banker roast beast.
Which was something the Grinch couldn't stand in the least!
And THEN They'd do something He liked least of all!
Every Who down in Wall Street, the Bulls and the Bears,
Would stand close together, with opening bells ringing.
They'd stand hand-in-hand. And the Whos would start singing!
They'd sing! And they'd sing! And they'd SING!
SING! SING! SING!
And the more the Grinch thought of this Singing,
The more the Grinch thought, "I must stop this whole thing!"
"Why, for year after year I've put up with it now!"
"I MUST stop a Wall Street bailout from coming! But HOW?"
Then he got an idea! An awful idea!
THE GRINCH GOT A WONDERFUL, AWFUL IDEA!
"I know just what to do!" The Grinch laughed in his throat.
And he made a some quick calls to spread rumours of unkown CDS stew.
And he chuckled, and clucked, "What a great short seller trick!"
"With this phone and this screen, I'll batter those Wall Street Dicks!"

"PoohPooh to the Whose Whos!" he was grinchishly humming.
"They're finding out now that no Chinese Knight is coming!"
"They're just waking up! I know just what they'll do!"
"Their mouths will hang open a minute or two,
Then the Whos down in Wall Street will all cry BooHoo!"
"That's a noise," grinned the Grinch, "That I simply MUST hear!"
So he paused. And the Grinch put his hand to his ear.
And he did hear noises over the trading screen glow.
It started low. Then it started to grow.
But the sound wasn't sad! Why, this sound sounded merry!
It couldn't be so! But it WAS merry! VERY!
He stared down at Bloomberg and Reuters! The Grinch popped his eyes!
Then he shook! What he saw was a shocking surprise!
Every banker down in Wall Street, the longs and the shorts,
Was singing! Without any White Knight at all!
He HADN'T seen a Big Wall Street bailout coming! IT CAME!
Somehow or other, it came!
And the Grinch, stood puzzling and puzzling: "How could it be so?"
"It came with out tickers! It came without a tab!"
"It came as Federal largesse in boxes and bags!"
And he puzzled three hours, till his puzzler was sore.
Then the Grinch thought of something he hadn't before!
"Maybe a Bailout," he thought, "is not just for financial Whooers"
"Maybe Fed bailout...perhaps...me... a little bit more!"
And what happened then? Well...on Greenwich Main Street they say,
That the Grinch's taxes grew 12 sizes that day!
And the minute his wallet didn't feel quite so tight,
He whizzed with his Lexus through the South Bronx morning light,
And he met those Wall Street boys for a Smith & Wolensky feast!
And he, HE HIMSELF! The Grinch carved the beef!

2008 Sep 23 12:39 AM